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Thursday, June 30, 2011

One of the big questions about Americans without health insurance is how much of a subsidy they would need in order to purchase such insurance willingly. The existing evidence on this point isn't especially on-point: for example, it sometimes involves looking across firms at the generosity of the health insurance policies that they offer, then looking at how many employees take up policies at each firm, and then drawing conclusions about the price people are willing to pay for insurance coverage. It's not clear how results from such studies would extrapolate to buying health insurance directly.

Alan Krueger and Ilyana Kuziemko tackle this question with survey data in a recent working paper. The Gallup Poll included some questions that they wrote in daily polling during late August and early Septemer 2008. The opening question took the form: "If you could get a health insurance policy for yourself that is as good as the one that members of Congress have, given yourcurrent fi nancial situation, would you buy it for $X a year, which works out to $X/12 per month?" As they explain, individuals were randomly assigned different starting values for X, and then if individuals said "no," they were asked a series of follow-up questions with a lower X. The survey also asked lots of other questions, so it was possible to figure out who was uninsured, along with health status and other useful variables. Based on this data, they calculated a demand curve for subsidized health care which looks like this:

They write: "Our results suggest that subsidizing the purchase of insurance plans would signi ficantly reduce the population of the uninsured. For example, we estimate that about sixty percentof the uninsured would voluntarily enroll for an annual premium of $2,000. Under the current specfii cation of subsidies in the ACA [the Affordable Care Act of 2010], we estimate that over 75 percent of uninsured adults would enroll, implying that some 39 million uninsured individuals would gain coverage as a result of the law. We also estimate that stripping the individual mandate fromthe law|the constitutionality of which is being challenged in federal court|would lead to between 7 and 12 million fewer individuals gaining coverage."

Of course, as the authors' recognize and try to address in various ways, there's always reason to be dubious about survey evidence: it's easier to say that you would buy insurance at a certain price than actually to buy it. But as part of an accumulation of evidence on what it would take to cover the uninsured, the results struck me as intriguing.

Wednesday, June 29, 2011

Peter Orszag wrote a column for Bloomberg describing some advances in technology that can help people track their health status. Along the way, Orszag cited a recent study by the National Academy of
Sciences that inequality in mortality was rising in the U.S. He writes: "Among 50-year-old men, for example, those in the highest education group are now projected to live almost six years longer on average than those in the lowest education group -- and this differential has been rising sharply."

I looked up the NAS report, or at least the free pre-publication uncorrected proofs copy available here. The report is generally well-done, as one would expect. But both on issues of mortality inequality within countries and between countries, there seemed to me some narrowness of perspective that left out complementary views.

On mortality inequality within countries

The report explains that inequality or mortality is increasing within countries because mortality rates for those with higher socioeconomic status (proxied by education, income, or a mixture of the two) are experiencing larger gains in mortality than those with lower socioeconomic status. This seems to hold true in recent decades not just in the United States, but also in a number of countries of western Europe. In turn, the report seeks to explain these differences in terms of behavioral patterns (like smoking and obesity) and health issues related to social status.

While this increase over the last few decades in inequality of mortality is certainly worthy of discussion, it is also worth noting an enormous decline in inequality of mortality, in countries all over the world, in the longer term. In my own Journal of Economic Perspectives, Sam Peltzman took on this topic in Fall 2009 issue in "Mortality Inequality." Peltzman uses a measure of inequality familiar to economists called the Lorenz curve, which is usually applied to measures of income. The top figure is based on data for 1852; the bottom figure on data for 2002. The straight line at a 45-degree angle shows perfect equality of mortality: that is, 20% of the population lives 20% of the total life-years at this time; 40% of the population lives 40% of the life-years for this group, and so on. The curved line is based on actual data. It shows that with high infant mortality, the bottom 30% of the distribution lived close to 0% of the life years. The gap between the perfect-equality line and the data curve shows the degree of inequality. By 2002, life years are MUCH more evenly distributed across the population.

This huge decrease in inequality of mortality outcomes over the last century or two is not just in the United States, but also in a wide array of other high-income and lower-income countries. Peltzman writes: "The substantial increase in longevity over the last century, both in the United States and around the world, is well-known. This essay has documented another aspect of that progress: a considerable contribution to social equality. The dominant fact about this history from a worldwide perspective is how much this aspect of human inequality has diminished. ... Inequality of lifetimes is well along in a historical transformation from a major source of social inequality into a minor one."

The recent trends from the NAS report do not alter Peltzman's basic conclusion.

On differences across countries

The main emphasis of the NAS report is, as the title reveals, "Explaining Divergent Levels of Longevity in High-Income Countries." A particular emphasis is that gains in U.S. life expectancy haven't been keeping up with gains elsewhere. "For US males, life expectancy at birth increased by 5.5 years from 1980 to 2006, the equivalent of 2.04 years per decade. While this is a significant achievement, it is less than the average increase for the other 21 countries examined for this study. Similarly, between 1980 and 2006, life expectancy at birth
for US women increased from 77.5 to 80.7 years, only slightly more than 60 percent of what was achieved, on average, in the same period in the other 21 countries examined."

In turn, it traces these differences back to death rates for lung cancer, heart disease, and stroke. In turn, this is traced back to international differences in smoking behavior in decades past. "Fifty years ago, smoking was much more widespread in the United States than in Europe or Japan: a greater proportion of Americans smoked and smoked more intensively than was the case in other countries. The health consequences of this behavior are still playing out in today’s mortality rates." The report also discusses diet and obesity.

All this is true enough, and intriguing. But there are reasons for differences in mortality across countries that don't trace back to smoking and diet. One interesting comparison from a few years ago by Robert L. Ohsfeldt and John E. Schneider, which appears in their 2006 book The Business of Health, compares actual life expectancy rates across countries to a "standardized rate" that is calculated after taking out fatal injuries due to causes like driving deaths and murder (using OECD data). I was surprised to see that if you leave out fatal injuries, it turns out that that average U.S. life expectancy vaults from near the bottom of the list of high-income countries up to the top.

To be fair, the NAS report is more focused on gains to life expectancy for those over the age of 50, and deaths in motor vehicles and from murder typically affect younger people. Still, in all the discussions that do use overall life expectancy numbers (not just life expectancies at age 50), it felt like an oversight to me that these causes of violent death don't come up in the NAS report.

"Place is the most important correlate of a person’s welfare. In the next few decades, a person born in the United States will earn a hundred times more than a Zambian, and live three decades longer. Behind these national averages are numbers even more unsettling. Unless things change radically, a child born in a village far from Zambia’s capital, Lusaka, will live less than half as long as a child born in New York City—and during that short life, will earn just $0.01 for every $2 the New Yorker earns. The New Yorker will enjoy a
lifetime income of about $4.5 million, the rural Zambian less than $10,000. A Bolivian man with nine years of
schooling earns an average of about $460 per month, in dollars that reflect purchasing power at U.S. prices. But the same person would earn about three times as much in the United States. A Nigerian with nine years of education would earn eight times as much in the United States than in Nigeria. This “place premium” is large throughout the developing world. The best predictor of income in the world today is not what or whom you know, but where you work."

I think I work hard. Lots of Americans think they work hard. But when you compare the economic situation of modern America with the rest of the world, or with long-ago history, then (in a phrase commonly attributed to the old football coach Barry Switzer) we're all born standing on third base, congratulating ourselves for hitting a triple.

Tuesday, June 28, 2011

The official federal budget projections are dishonest. They make future budget deficits look smaller by enacting spending cuts and tax increases that won't kick in for some years--but then then Congress and the President postpone or eliminate those changes before they actually take place. As a result, the nonpartisan Congressional Budget Office has for some years offered two sets of budget projections: the "extended baseline scenario" is based on what current law says will happen in the next 10 years; the "alternative fiscal scenario" assumes that certain changes aren't going to be made, and thus probably presents a more realistic picture. The CBO's 2011 Long-Term Budget Outlook shows the difference.

Start with the basic projection of how much debt the U.S. economy will accumulate in the next 25 years. The "extended baseline scenario" says that the rise in the debt/GDP ratio has pretty much topped out at this point, and will rise to a little over 80% of GDP by 2035. The "alternative fiscal scenario" is much more grim, suggesting that the debt/GDP ratio would approach 200% of GDP by 2035. Just to be clear, this forecast doesn't mean that the U.S. government would actually be able to borrow this much--only that we are on a debt accumulation path that looks unsustainable.

What are the different underlying assumptions here? Take a look at the different paths of taxes and spending in the two scenarios.

On the tax side, the "extended baseline" scenario has a bunch of tax increases arising in future years: for example, the expiration of the Bush tax cuts of the early 2000s, a gradual rise in the revenues collected by the alternative minimum tax, and others. As a result, it is based on federal taxes collecting 23% of GDP by 2035--far above the level seen in recent decades. In contrast, the "alternative fiscal scenario" is that federal taxes in the long-term will be more-or-less at their historical average for the last few decades of 18% of GDP.

On the spending side, both scenarios show that in the future, when you are asked for a short description of what the federal government actually does, the appropriate answer will be "retirement and health care spending." The two scenarios don't differ in projected Security spending. In Medicare spending, the "extended baseline scenario" incorporates cuts to physician pay in the future; the "alternative fiscal scenario" says that physician pay will remain at 2011 levels. Also, in the "extended baseline scenario," CBO explains that "government spending on everything other than the major mandatory health care programs, Social Security, and interest on federal debt—activities such as national defense and a wide variety of domestic programs—would decline to the lowest percentage of GDP since before World War II." In the alternative scenario, these other areas of government spending remain at the current levels as a share of GDP.The other big spending difference is that the "primary spending" lines shown here leave out interest payments on past borrowing, which grow MUCH larger with the larger deficits in the the "alternative fiscal scenario."

Of course, one can quibble with the details of what is assumed in the "alternative fiscal scenario." But from where I sit, the official budget predictions in the "extended baseline scenario" look intentionally misleading, and the CBO is performing a public service by offering more plausible projections.

Monday, June 27, 2011

Mark A. Wynne of the Dallas Fed asks: "Will China Ever Become as Rich as the U.S.?" The standard answer here is that the total size of China's economy may well exceed that the total size of the U.S. economy within a couple of decades, but because China has nearly four times the U.S. population, it will take much longer for China to catch up in per capita terms.

Wynne writes: "The simplest approach is to measure GDP in U.S. dollars at 2005 prices and use 2005 exchange rates. Doing so results in estimated 2010 Chinese GDP of $3.88 trillion in 2005 dollars, or just less than 30 percent of U.S. GDP. China's economy will exceed that of the U.S. in 2025 if it continues expanding at its past-decade rate of just more than 10 percent a year and the U.S. keeps growing at the 1.7 percent annual rate it experienced during the period. Per capita GDP allows us to compare the relative well-being of residents of the two nations. Based on the 2010 U.S. population of 309 million, per capita GDP was $42,874 last year. China, with a 2010 population of 1.34 billion, had per capita GDP of $2,893 last year, or 6.7 percent of the U.S. figure."

Of course, it is not inevitable that China will continue at this rapid rate of growth for the next several decades. Wynne points out that on average, countries with lower per capita GDP have faster growth rates. However, it also seems to be true that as countries reach some level of middle-income, their growth rates slow down. On explanation for this "middle income trap" is that the growth policies that help in catch-up growth do not work as well as an economy reaches higher-income levels. Wynne offers a nice figure to illustrate how the G-7 economies caught up to the U.S. economy since 1950, at least to some extent, but then seemed to stop catching up up when they hit (very roughly) 80% of U.S. per capita GDP. The figure also puts China's growth path in perspective.

I wonder whether China isn't likely to experience more than one "middle income trap" as its economy expands. The Chinese pattern of growth in the last decade or so from a macro perspective has been based on extremely high savings rates, rapid growth in heavy manufacturing, large trade surpluses, and huge internal migration of labor. Over the years and decades to come, as these patterns evolve, China's economic growth will almost inevitably have some fits and starts.

Focus on six populous Middle Eastern countries where solid labor market data is available: Egypt, Jordan, Lebanon, Morocco, Syria, and Tunisia. Abdih writes: "High unemployment in these countries, together with low labor force participation rates, has resulted in very low ratios of employment to working-age population. With less than 45 percent of working-age people actually employed, this regional rate is the lowest for any region in the world."

When you look at youth employment in particular, the situation is equally dismal. They write:"The average unemployment rate among youth in these nations was 27 percent in 2008, higher than in any other region in the world ... In contrast to most of the world, joblessness in many Middle Eastern countries tends to increase with schooling: the unemployment rate among those with college degrees exceeds 15 percent in Egypt, Jordan, and Tunisia."

They provide a useful table showing different levels of the gas tax, and revenue-equivalent levels of a vehicle-miles traveled tax. For example, the current federal gas tax of 18 cents/gallon is equal to a vehicle-miles traveled tax of about penny per mile. A federal gas tax of $2/gallon would be equal to a vehicle miles travelled tax of about 10 cents per mile.

They make a case: "Although gas taxes advance environmental stewardship and energy security, VMT fees provide a more sustainable future for funding of transportation infrastructure."

My own sense is that there are multiple policy goals here: funding transportation infrastructure, reducing fossil fuel use for a variety of reasons, and addressing traffic congestion. It may take several policy tools--perhaps including a fuel tax and a vehicle-miles traveled tax and congestion pricing--to hit all three goals.

Setting the stage. "The number of science doctorates earned each year grew by nearly 40% between 1998 and 2008, to some 34,000, in countries that are members of the Organisation for Economic Co-operation and Development (OECD). The growth shows no sign of slowing: most countries are building up their higher-education systems because they see educated workers as a key to economic growth ... . But in much of the world, science PhD graduates may never get a chance to take full advantage of their qualifications."

In the United States: "To Paula Stephan, an economist at Georgia State University in Atlanta who studies PhD trends, it is “scandalous” that US politicians continue to speak of a PhD shortage. The United States is second only to China in awarding science doctorates — it produced an estimated 19,733 in the life sciences and physical sciences in 2009 — and production is going up. But Stephan says that no one should applaud this trend, “unless Congress wants to put money into creating jobs for these people rather than just creating supply”. The proportion of people with science PhDs who get tenured academic positions in the sciences has been dropping steadily and industry has not fully absorbed the slack. The problem is most acute in the life sciences, in which the pace of PhD growth is biggest, yet pharmaceutical and biotechnology industries have been drastically downsizing in recent years."

In Japan: "Of all the countries in which to graduate with a science PhD, Japan is arguably one of the worst. In the 1990s, the government set a policy to triple the number of postdocs to 10,000, and stepped up PhD recruitment to meet that goal. The policy was meant to bring Japan’s science capacity up to match that of the West — but is now much criticized because, although it quickly succeeded, it gave little thought to where all those postdocs were going to end up. Academia doesn’t want them: the number of 18-year-olds entering higher education has been dropping, so universities don’t need the staff. Neither does Japanese industry, which has traditionally preferred young, fresh bachelor’s graduates who can be trained on the job. The science and education ministry couldn’t even sell them off when, in 2009, it started offering companies around ¥4 million (US$47,000) each to take on some of the country’s 18,000 unemployed postdoctoral students ..."

In China: "The number of PhD holders in China is going through the roof, with some 50,000 people graduating with doctorates across all disciplines in 2009 — and by some counts it now surpasses all other countries. The main problemis the low quality of many graduates."

In Germany: "Germany is Europe’s biggest producer of doctoral graduates, turning out some 7,000 science PhDs in 2005. After a major redesign of its doctoral education programmes over the past 20 years, the country is also well on its way to solving the oversupply problem. Traditionally, supervisors recruited PhD

students informally and trained them to follow in their academic footsteps, with little oversight from the university or research institution. But as in the rest of Europe, the number of academic positions available to graduates in Germany has remained stable or fallen. So these days, a PhD in Germany is often marketed

as advanced training not only for academia— a career path pursued by the best of the best — but also for the wider workforce.Universities now play a more formal role in student recruitment and development, and many students follow structured courses outside the lab, including classes in presenting, report writing and other transferable skills. Just under 6% of PhD graduates in science eventually go into full-time academic positions, and most will find research jobs in industry..."

In India: "In 2004, India produced around 5,900 science, technology and engineering PhDs, a figure

that has now grown to some 8,900 a year. This is still a fraction of the number from China and the United States, and the country wants many more, to match the explosive growth of its economy and population. ... But there is little incentive to continue into a lengthy PhD programme, and only around 1% of undergraduates currently do so. Most are intent on securing jobs in industry, which require only an undergraduate

degree and are much more lucrative than the public-sector academic and research jobs that need postgraduate education."

Wednesday, June 22, 2011

In one interesting figure, he compares oil price shocks of 1862-1865, 1973-1981, and 2002-2009. He argues that a common factor in each of these episodes (not the only factor!) was "declining production from the maturing oilfields on which the world had been depending at the time": specifically, the decline of the Pennsylvania oil fields in the 1860s, the decline of U.S. oil production starting in the 1970s, and the fall in oil production from mature oil fields in the North Sea and in Mexico in recent years.

Hamilton also argues that "in fact all but one of the 11 U.S. recessions since World War II were preceded by a sharp increase in the price of crude petroleum," and presents an intriguing table showing some patterns for the five recessions before the Great Recession.

How many people go abroad for medical procedures? "In 2009, Deloitte revised its estimates down to 648,000 travelers annually, but forecast 35 percent increases in each of the threesucceeding years. It predicts that more than1.6 million Americans will travel abroad for health care in 2012."

What is the assurance of quality? "Accreditation from the Joint Commission International (JCI) is recognized worldwide as the gold standard for hospitals. JCI screens facilities for the condition of their physical plants, their management of medications, the quality of their surgical care, their commitment to continuous improvement, and their responsiveness to feedback from patients. In the United States, the organization accredits more than 17,000 facilities, from hospitals to laboratories to long-term-care centers. JCI began accrediting hospitals outside the country in 1999. Today, the organization vouches for the quality of care at some 400 institutions in 45 countries from Austria to Yemen."

What are some of the potential cost savings?

Incidentally, the Milken Institute Review, with Peter Passell as editor-in-chief, is a consistently excellent source for lively and well-written essays on economic policy. The contents are available free on-line, although you do need to fill out a registration form.

On current taxation of employer-provided health insurance: "Well, it certainly reduces the after-tax price of health insurance for people. The problem is that it reduces the price below the true social cost, so that people acting in their own family's interest, are, at the margin, buying insurance where the value to them is actually less than the true cost. In a word, we are subsidizing high-deductible, low copay insurance policies and, given the upward trend we are seeing in the fraction of our gross national product that goes to health care, I think we ought to be moving toward reducing or eliminating such subsidies. Not only that, it's a very unattractive sort of subsidy, because the subsidy rate is dependent on the household's marginal tax rate, so the subsidy rate is highest for the highest-income people. And I just don't think that even people who would argue for a subsidy would favor such regressivity if they were designing a subsidy scheme from scratch. The reason to be wary about abandoning the subsidy is that it supports the system of employer-provided health insurance, which spreads risks across employees and offsets the problem of adverse selection that can plague health insurance markets; before we eliminate the subsidy entirely, we need to have other policies in place to prevent a collapse of efficient markets for health insurance."

On how high-income people react to high tax rates: "My own view ... is that certainly high-income people notice taxes, and they react to taxes in ways that lower their exposure to taxes. The evidence for taxes substantially affecting what one might call "real" behavior, such as labor supply or savings, is not as strong as the evidence regarding another class of behaviors we might label "avoidance.""

On how saving is affected by fear of nuclear war: "I have three articles that try to estimate whether, when people seriously think there's a chance of a nuclear conflagration, this belief affects their saving behavior. In short, do people believe we ought "to eat, drink, and be merry, for tomorrow we die?" To test this hypothesis I looked at aggregate saving over time in the United States, across countries, and micro data within the United States, and in all three cases found that when people think, or profess to think, there's a chance of a nuclear war, their saving rate goes down, just as economic theory would predict."

On how people time their deaths to reduce estate taxes: "We looked at estate tax return data from the history of the U.S. estate tax and found that when the estate tax was going to change — go up or down — in an anticipated way, then the distribution of deaths around that date was not symmetric. When the tax rate was going to increase, more people died before the rate rose, and when the tax rate was going to be lowered, people held on and more people died after the decrease. Since we wrote the paper, the general "death elasticity" finding has been replicated using data from episodes in Australia and Sweden when they ended their estate taxes. Those studies found evidence that people delayed their death to save their heirs' money, in some cases, millions and millions of dollars."

"[T]he economy is so complex that there is little hope of understanding much without models. I just don’t want these models to acquire a life that is independent from the purpose they are ultimately designed to serve, which is to understand the functioning of real economies.... [T]he current core of macroeconomics has become so mesmerized with its own internal logic that it begins to confuse the precision it has achieved about its own world with the precision it has about the real one.

"There is absolutely nothing wrong with building stylized structures as just one more tool to understand a piece of the complex problem. My problems with this start when these structures take on a life on their own, and researchers choose to “take the model seriously”—a statement that signals the time to leave a seminar, for it is always followed by a sequence of naïve and surreal claims....

"My point is that by some strange herding process, the core of macroeconomics seems to transform things that may have been useful modeling short-cuts into a part of a new and artificial “reality.” And now suddenly everyone uses the same language, which in the next iteration gets confused with, and eventually replaces, reality. Along the way, this process of make-believe substitution raises our presumption of knowledge about the workings of a complex economy and increases the risks of a “pretense of knowledge” about which Hayek warned us in his Nobel Prize acceptance speech."

Here's Caballero on why it's misguided, once a financial is actually underway, to worry that financial bailouts will create moral hazard incentives for high-risk behavior.

"I still recall politicians and economists calling for the need to teach lessons (in a punitive sense) to the financial system in the middle of the crisis. In fact, I think Lehman happened to a large extent due to the political pressures stemming from this view. What timing! ...

"I draw an analogy between panics and sudden cardiac arrest. We all understand that it’s very important to have a good diet and good exercise in order to prevent cardiac arrest. But once you’re in a seizure, that’s a totally secondary issue. You’re not going to solve the crisis by improving the diet of the patient. You don’t have time for that. You need a financial defibrillator, not a lecture. ...

The main dogma behind the great resistance in the policy world to institutionalize a public insurance provision is the idea that if the financial defibrillator were to be implanted in an economy, banks and their creditors would abandon all forms of a healthy financial lifestyle and would thus dramatically increase the chances of a sudden financial arrest episode.

"This moral hazard perspective is the equivalent of discouraging the placement of defibrillators in public places out of concern that, upon seeing them, people would have a sudden urge to consume cheeseburgers because they would realize that their chances of surviving sudden cardiac arrest had risen as a result of the ready access to defibrillators.

"But actual behavior is less forward-looking and rational than is implied by that logic. People indeed consume more cheeseburgers than they should, but this is more or less independent of whether or not defibrillators are visible. Surely there is a need for advocating healthy habits, but no one in their right mind would propose doing so by making all available defibrillators inaccessible. Such a policy would be both ineffective as an incentive mechanism and a human tragedy when an episode of sudden cardiac arrest occurs.

"I think this is one of the many instances when economists and politicians choose to solve a second-order problem they understand rather than focusing on what actually happens in real life."

The Minneapolis Fed publishes a magazine called the Region that has consistently excellent interviews with leading economists. The June 2011 issue has an interview with Ricardo Caballero, who is chairman of the MIT economics department. To avoid making this post of encyclopedic length, I'm going to break it into three parts: Caballero on the demand for safe assets in the financial crisis, on moral hazard concerns during a financial crisis, and on how to do macroeconomics these days. But the excerpts in these three posts just scratch the surface of the interview, and the whole thing is worth reading.

Here's Caballero on what he sees as the underlying root of the financial crisis: a global shortage of financial assets, and especially highly-rated fixed income assets. In describing the financial crises, he says:

"It’s a story in two steps. The first, present at least since the Asian crisis, is that the world has experienced a shortage of assets to store value. Emerging and commodity-producing economies have added an enormous demand for assets that is not being met by their limited ability to produce these assets. I believe this global asset shortage is one of the main forces behind the so-called global imbalances, the low equilibrium real interest rates that preceded the crisis, and the recurrent emergence of bubbles. Contrary to the conventional wisdom, I think these phenomena are not the result of loose monetary policy, but rather the other way around: Monetary policy is loose because an asset shortage environment would otherwise trigger strong deflationary forces. ...

"This is the second step, which began in earnest after the Nasdaq crash, when foreign demand for U.S. assets went back to its historical pattern of being heavily concentrated on fixed income ... and especially on highly rated instruments. ...The enormous demand for U.S. assets, with a heavy bias toward “AAA” instruments, could not be satisfied by U.S. Treasuries and single-name corporate bonds, and that imbalance generated huge incentives for the U.S. financial system to produce more “AAA” assets. As a result, we saw both the good and the bad sides of the most dynamic financial system in the world, in full force. Subprime loans became inputs into financial vehicles, which by the law of large numbersand by the principles of tranchingwere able to create "AAA" instruments from those that were not. ...

"Unfortunately, by construction, AAA tranches generated from lower-quality assets are fragile with respect to macroeconomic and systemic shocks, when the law of large numbers doesn’t work. That is, this way of creating safe assets may be able to create micro-AAA assets but not macro-AAA assets. In other words, these assets were not very resilient to macroeconomic shocks, even though they might have technically met AAA risk standards. ...

"In principle, this was not a big issue, but it became a huge one when highly leveraged systemically important institutions began to keep these macro-fragile instruments in their balance sheets (directly, or indirectly through special-purpose vehicles, or SPVs This was an accident waiting to happen; AIG and the investment banks should have known better, but the low capital charges were too hard to resist."

Thursday, June 16, 2011

The U.S. government imposes a tax of 18.4 cents/gallon on gasoline as a main source of financing for the Highway Trust Fund. However, the tax rate hasn't been raised since 1993, so inflation has eaten away at its real value. In addition, as fuel economy improves, miles travelled are rising faster than fuel consumption. Thus, the Highway Trust fund has been spending roughly $10 billion more per year since 2008 on highway projects than the fuel tax takes in. Thus, there have been proposals to switch from a fuel tax to a vehicle-miles tax as a way of funding highways. Here are a some thoughts about this policy:

1) Both a fuel tax and a vehicle-miles tax can be viewed as user fees--that is, those who use the roads are paying for their maintenance and upkeep.

3) The administrative apparatus for collecting the fuel tax is in place, and there are severe issues with how a vehicle-miles tax would be implemented. Sorenson, Ecola, and Wachs write: “Mileage-based road use fees could be implemented in various ways, but three options appear to offer the greatest promise: (1) estimating mileage based on a vehicle’s fuel economy and fuel consumption, (2) metering mileage based on a device that combines cellular service with a connection to the onboard diagnostics port, and (3) metering mileage based on a device that contains a global positioning system (GPS) receiver." The first method seems a little rough-and-ready, and might need to be collected once a year, perhaps when auto registration is renewed. It would be much more visible to the public than the existing fuel tax. The other two methods raise legitimate privacy concerns: should the government really have the power to track where all cars have gone? One way or another, collection costs are likely to be higher for a new vehicle-miles tax.

4) A vehicle-miles tax does not reward driving a fuel-efficient automobile--which may help the poor. The Congressional Budget Office published in March 2011 a comparison of a vehicle-miles tax vs. the existing fuel tax in “Alternative Approaches to Funding Highways.” “VMT taxes are qualitatively similar to fuel taxes in their implications for equity. Like fuel taxes, they satisfy the user-pays principle, but they impose larger burdens relative to income on people in low-income or rural households. However, to the extent that members of such households tend to drive vehicles that are less fuel efficient, such as pickup trucks or older automobiles, those highway users would pay a smaller share of VMT taxes than of fuel taxes.”

5) Trying to sort out the relevant externalities is tricky. The CBO suggests that costs imposed by highway users can be divided up into costs more related to miles travelled and costs more related to fuel use. "Mileage-related costs, which include the costs associated with pavement damage, congestion,
accidents, noise, and emissions of local air pollutants by passenger vehicles, in fact account for the majority
of total costs. (The costs associated with local air pollution from passenger vehicles are considered mileage
related because those emissions, unlike emissions from trucks, are regulated on a per-mile basis.) Fuel-related costs include the costs of local air pollution from trucks, climate change, and dependence on foreign oil." I'm not sure that a single policy can sensibly address costs of road maintenance and construction, environmental costs of fossil fuels, and costs of congestion. Trucks are much harder on pavement than cars. Contributions to congestion depend on when and where you drive. Pollution is affected by the type of car you drive, not just by miles traveled.

Wednesday, June 15, 2011

The Global Commission on Drug Policy seems to be a more-or-less self-appointed group of "world leaders," including former Presidents of Brazil , Colombia, Mexico and Switzerland, along with Kofi Annan, Richard Branson, George Shultz, Paul Volcker, and others. Its Report is a call to "end the criminalization, marginalization and stigmatization of people who use drugs but who do no harm to others."

The report has facts, comparison studies, and citations that should make it of interest to those on all sides of this issue. For example, you can get a quick overview of areas that have decriminalized or legalized use and possession of various drugs, including Portugal, which in 2001 "became the first European country to decriminalize the use and possession of all illicit drugs."

One figure that interested me showed the rise in consumption in certain well-known illegal drugs in the last decade or so.

Another figure shows a ranking of psychoactive drugs according the actual and potential harms they could cause to society, as defined by a team of scientists publishing in The Lancet a few years ago. The color classifications, on the other hand, represent the seriousness with which each of these drugs are treated in international treaties. Thus, heroin and cocaine are ranked as highly risky, and international law treats them that way. But the items ranked fourth, fifth, and eighth on the list by the experts--alcohol, ketamine, and tobacco--are not subject to international control. Like many aspects of drug policy, it's one of those things that makes you go hmmmm.

On why price measurement matters: "My interest in price measurement really came out of discussions I had with [Stanford economist] Pete Klenow. Our interest was always less in thinking about inflation and prices. It was rather on the fact that whatever you mismeasure on prices affects how you measure real incomes and economic growth. ... Because if you overestimate inflation by 1 percent, then instead of being, say, 1 percent per year real growth, it is really 2 percent per year. Well, that means the growth rate is doubled!"

On inflation and quality change in health care prices: "If I compare healthcare costs today versus in the year 1800, well, I could go out and buy a bunch of leeches today for almost nothing. And I could have the healthcare I had in 1800. If you had a certain condition and you had $10,000 to get treated at today’s health prices, or $10,000 to get treated at 1960s prices with 1960s technology, I don’t think it’s so obvious that people would want to go back in time to get their important health conditions dealt with. In that sense, you say, I don’t know if there’s inflation. It’s pretty hard to say that there’s been a lot of inflation over the long haul in healthcare."

On quality improvements and car prices: "My first car was a 1983 Accord, which cost $9,600. It was a great car, but it didn’t have any of the safety equipment that you have today. It didn’t have power windows. It didn’t have air conditioning. It didn’t have many features. If you took that same car—it did get good gas mileage, actually—and you tried to sell it as a new car today, I don’t think you would get $9,600 for it, if you had to compete with what’s out there."

On why some changes in consumer prices affect macroeconomic national income more than others: "A consumer price index isn’t an ideal measure of what’s happening to real income. That’s partly why I think that gasoline is a problem—because it’s so much an imported good. When its price goes up, that’s really a big loss in real income. Whereas when it’s a good that’s produced here, the loss in real income is that it takes more resources to produce it. If our efficiency drops in producing food, and then the food prices go up, that’s a real loss in income. If there’s an upward shock in prices, then the farmers—the people selling the food—do at least get some benefit from the price increases."

On the imprecision of hedonic adjustments to price measurements: "There’s a classic example for vehicles. If you look at gas efficiency, miles per gallon, everything else equal, people would rather get better gas mileage. There’s not much question about that. But if you’re using a hedonic equation, and you say everything else that I observe, how much more are people willing to pay for better fuel efficiency? You actually get a negative number. If I take two vehicles, the characteristics I enter for them, plus miles per gallon/fuel efficiency, I’ll see the one that gets better miles per gallon tends to go for a lower price. ... [T]here are very limited characteristics that we’re entering about the vehicle. So all these unmeasured characteristics that people like in their cars tend to be in a luxury car, and we’re not recording all those. They may not care so much about the fuel efficiency; they want performance of the engine. So when I, as a price measurer, look just at this, I’ll price fuel efficiency negatively. That means that if all the cars in the country got more fuel efficient, and we employed the hedonics literally, we would say inflation went up. Even with computers there are problems like this. These hedonic coefficients jump around a lot."

Monday, June 13, 2011

Michael Giberson of Texas Tech University has written a nice readable essay on "The Problem with Price Gouging Laws." Part of the essay rehearses standard economic arguments over such laws, but with a nice variety of examples and discussion from both economists and philosophers. The case for price gouging laws, of course, is that raising the price for selling necessary goods during an emergency is morally offensive. But economists are congenitally open to the possibility that, upon deeper reflection, people's first quick reactions about what is "right" or "wrong" may be misleading. Price gouging laws have the following predictable consequences:

Discourage bringing supplies into certain areas. As one example, there is a chain of convenience stores in Tennessee called Weigle's. It sells gasoline, and it buys that gasoline on the spot market--not under long-term contracts. In 2008, when Hurricanes Gustav and then Ike tore through the Gulf of Mexico and shut down oil drilling, Weigle's ran out of gas. They trucked gas in from other cities, but the extra costs meant that they raised the price of gas by about $1/gallon. This let to an investigation by the state attorney general, which was eventually settle without an admission of wrongdoing, but with a mixture of payments to the state and consumer refunds. The next time a similar situation arises, one wonders whether Weigle's will choose to pay the higher costs of trucking in gasoline from other cities. In South Carolina during the same episode, a number gas stations apparently just closed their doors, rather than risk facing charges of price gouging. More generally, if you want people from the cities surrounding a disaster area to bring in ice and food and batteries and other supplies for sale, then you need to be concerned that price gouging laws will discourage them from doing so.

Discourage conserving on key resources. If prices rise during an emergency, people have an incentive to buy only what they need, and not to stock up. As a result, supplies will run out more slowly and remain available for more people. Imagine a situation in which prices of hotel rooms are not allowed to rise, at a time when many evacuated families are looking for a room. A large family might reserve two rooms at the capped rate, but decide to crowd into one room at a higher rate--thus leaving a room available for another family.

Concentrate economic losses on certain economic actors. Price gouging laws often impose costs on merchants, whose costs rise in times of emergencies. They impose larger costs on smaller firms, who have a harder time getting resupplied, than they do on large national chains that have a built-in ability to shift supplies from elsewhere.

Concentrate economic losses on the disaster area. One study sought to analyze what would have happened in the aftermath of Hurricanes Katrina and Rita, if price-gouging laws had been in place. It found that such a law would have caused greater losses in the disaster areas, because if would have discouraged suppliers in neighboring areas from bringing in supplies. However, the neighboring areas would have moderated any costs to the neighboring areas, because supplies from those areas weren't being shipped to the disaster area. A web of economic transactions acts as a mechanism for spreading costs of shortages over a wider geographic area.

Before reading this article, I hadn't realized that the creation and spread of price-gouging laws is a relatively recent development. Giberson writes: "The first state law explicitly directed at price gouging was enacted in New York in 1979, in response to increases in home heating oil prices during the winter of 1978–1979. ...
Just three states passed similar laws in the 1980s: Hawaii in 1983, and Connecticut and Mississippi in 1986. Then, 11 more states added anti-price gouging laws or regulations in the 1990s and 16 states followed in the 2000s. When price gouging laws are revised, the tendency is for the scope of the law to be broadened, the penalties to become more punitive, and the conditions under which the laws are applied to become less restrictive."

In the 2010 Annual Report of the Globalization and Monetary Policy Institute at the Dallas Fed, Janet Koech has an essay on Africa--Missing Globalization's Rewards? Compared with growth stories like China and India, economic growth in Africa remains anemic. Yet I've been wondering for a few years, based on little hints here and there, whether economic growth in Africa countries might be picking up. The modest upturn in Africa's exports and foreign direct investment since about 2000 as a share of world totals are one such hint:

Friday, June 10, 2011

Andreas Hornstein and Thomas A. Lubik of the Richmond Fed write about "The Rise in Long-Term Unemployment: Potential Causes and Implications." They define long-term unemployment as lasting more than 26 weeks. They write: “The share of long-term unemployment [as a proportion of total unemployment] peaked at 46 percent in the second quarter of 2010, and averaged a bit more than 43 percent for all of 2010. This peak value for the share of long-term unemployment is significantly higher than the previous peak of 26 percent that was attained following the 1981–82 recession. Finally, mean duration of unemployment had increased to about 35 weeks by the middle of 2010, again a substantial increase over the previous peak for mean unemployment duration of 21 weeks after the 1981–82 recession. Never before in the postwar period have unemployed workers been unemployed for such a long time.”

Here's an illustrative figure. The left axis measures the unemployment rate. The right axis measures what share of the unemployed are long-term unemployed--more than 26 weeks.

Much of the rise in overall unemployment is due more people entering long-term unemployment than in the past, and to those who have been long-term unemployed having a harder time finding jobs than in the past. This is a potentially major change for the U.S. economy. This figure shows that over the 1968 to 2006 period, U.S. workers were employed in any given month had one of the highest chances compared to other countries of losing that job in that month, but at the same time, a U.S. worker who was unemployed in any given month also had the highest chance of finding a job that month compared to other countries.

The very high rates of long-term unemployment, and the difficulties that the long-term unemployed are having in finding jobs, suggests that the true unemployment picture may be even more grim than the headline statistics suggest.

When the economy hits a recession, tax revenues drop automatically, without any change in legislation. Spending on certain programs to help those in need rises automatically, as more people draw on those programs, without any change in legislation. How much of the current budget deficits are due to discretionary changes in tax or spending policy, and how much to these kinds of automatic changes?

The effect of the automatic stabilizers is large in recent years. The CBO writes: "In 2010,
CBO estimates, automatic stabilizers added the equivalent of 2.4 percent of potential GDP to the deficit, an
amount somewhat greater than the 2.1 percent added in 2009.3 According to CBO’s baseline projections, the contribution of automatic stabilizers to the budget deficit will decrease as a share of potential GDP—to 2.1 percent in 2011, 1.7 percent in 2012, and 1.5 percent in 2013 ... . That contribution will then continue to fall—to 1.0 percent in 2014, 0.5 percent in 2015, and 0.1 percent in 2016—consistent with CBO’s
projection for output to come back up near potential output by 2016."

It's also interesting to note that the budget surpluses of the late 1990s were made larger because of automatic stabilizers: that is, the unsustainably booming economy of that time brought in extra tax revenue and held down the need for supportive social spending in those years.

“Today the Board of Governors web site lists 12 monetary policy tools. Nine of them didn’t exist four years ago. The good news is that six of those tools are no longer in existence, reflecting the improvement in financial conditions.”

“Now, there’s no question that Keynes, Friedman, and Tobin were among the greatest monetary theorists of all time. Their theories are elegant statements of fundamental economic principles. As such, they deserve to be taught for a long time to come. But viewing them as definitive in today’s world is like thinking that rock and roll stopped with Elvis Presley. The evolution of money and banking since the 1950s is at least as dramatic as what’s happened with popular music—not that I want to compare the Fed with Lady Gaga.”

“The Federal Reserve has added $1.5 trillion to the quantity of reserves in the banking system since December 2007. Despite a 200 percent increase in the monetary base—that is, reserves plus currency—measures of the money supply have grown only moderately. Over this period, M1 increased 38 percent, while M2 increased merely 19 percent. In other words, the money multiplier has declined dramatically. Indeed, despite all the headlines proclaiming that the Fed is printing huge amounts of money, since the end of 2007 M2 has grown at a 5½ percent annual rate on average. That’s only slightly above the 5 percent growth rate of the preceding 20 years.”

“But now banks earn interest on their reserves at the Fed and the Fed can periodically change that interest rate. This fundamental change in the nature of reserves is not yet addressed in our textbook models of money supply and the money multiplier. Let’s think this through. At zero interest, bankers feel considerable pressure to lend out excess reserves. But, if the interest rate paid on bank reserves is high enough, then banks no longer feel such a pressing need to “put those reserves to work.” In fact, banks could be happy to hold those reserves as a risk-free interest-bearing asset, essentially a perfect substitute for holding a Treasury security. If banks are happy to hold excess reserves as an interest-bearing asset, then the marginal money multiplier on those reserves can be close to zero. In other words, in a world where the Fed pays interest on bank reserves, traditional theories that tell of a mechanical link between reserves, money supply, and ultimately inflation no longer hold.”

“Instead, the Fed provided additional stimulus by purchasing longer-term securities, another policy tool absent from standard textbooks. From late 2008 through March 2010, the Fed bought $1.7 trillion in such instruments. Then, in November 2010, we announced we would purchase an additional $600 billion in longer-term Treasury securities by the end of June 2011. … I estimate that these longer-term securities purchase programs will raise the level of GDP by about 3 percent and add about 3 million jobs by the second half of 2012. This stimulus also probably prevented the U.S. economy from falling into deflation.”

A group at the McKinsey Global Institute has published: “Internet matters: The Net’s sweeping impact on growth, jobs, and prosperity.” They look at the 13 economies that together make up 70 percent of the world economy. Here are a few highlights:“Internet-related consumption and expenditure is now bigger than agriculture or energy, and our research shows that the Internet accounts for, on average, 3.4 percent of GDP in the 13 countries we studied. ... The Internet's total contribution to the GDP is bigger than the GDP of Spain or Canada, and it is growing faster than Brazil.”

“[I]n the mature countries we studied, the Internet accounted for 10 percent of GDP growth over the past 15 years. … And over the past five years, the Internet’s contribution to GDP growth in these countries doubled to 21 percent.

“[A] simulation shows that an increase in Internet maturity similar to the one experienced in mature countries over the past 15 years creates an increase in real per capita GDP of $500 during this period. It took the Industrial Revolution of the 19th century 50 years to achieve the same results.”

"[A] detailed analysis of the French economy showed that while the Internet has destroyed 500,000 jobs over the past 15 years, it has created 1.2 million others, a net addition of 700,000 jobs or 2.4 jobs created for every job destroyed. This conclusion is supported by McKinsey's global SME [small and medium enterprise] survey, which found 2.6 jobs were created for every one destroyed."

“In total, the consumer surplus generated by the Internet in 2009 ranged from€7 billion ($10 billion) in France to €46 billion ($64 billion) in the United States.”

"The United States captures more than 30 percent of global Internet revenues and more than 40 percent of net income."

Wednesday, June 8, 2011

For a summit of the Group of Eight on May 27, 2011, the staff of the IMF produced a useful memo on the economies of the Middle East and North Africa (MENA) region: "Economic Transformation in MENA: Delivering on the Promise of Shared Prosperity." The fundamental issue for the region, as I see it, is that unemployment rates are very high and economic growth rates are low. Moreover, the region barely participates in the global economy, other than oil, and has a poor climate for starting businesses. So it's not clear where future growth in jobs will come from. Here are figures to illustrate these themes:

Per capita economic growth has been slow in this region from 1980 to 2010, compared to Asia, Latin America, and even Africa.

Unemployment is a severe problem for countries in this region. Overall unemployment rates are often in the range of 10-15%. Youth unemployment rates often exceed 20%.

Other than oil, this region participates little in globalization. The top lines show non-oil export as a share of world exports for emerging Asia and for all emerging and developing economies. The bottom line, down around 1-2%, is the share of non-oil world exports for the Middle East and North Africa region.

The business climate for the Middle East and North Africa region isn't strong. In this "spider web" diagram, each of the labels around the outside shows a measure of how easy it is to do business in an area, based on World Bank data. The countries of the world are ranked on these criteria, and lower rankings are better. The dashed line shows the average country ranking for emerging Asia on these measures; the dark blue line shows the average ranking for oil importing countries in the Middle East and North Africa.

Accountable care organizations are one of the hot ideas for holding down health care costs; they are an attempt to find a middle way between the problems of fee-for-service and the problems of capitated insurance plans like health maintenance organizations.

A problem with fee-for-service, of course, is that it reduces the incentives to hold down costs when providing or consuming health care services. A problem with a capitated plan, which pays a fixed amount per patient, is that it provides too much incentive to hold down on costs by delaying or denying health care. The idea of an accountable care organization is that it receives a fixed payment per person, but it is also evaluated on the basis of many criteria for the delivery of high-quality care: that is, measures like how many people get appropriate preventive care services, whether chronic conditions are treated in ways that avoid unneeded hospitalization, whether various protocols are follows in dealing with certain conditions, and the like. These measures of the quality of care should help to reduce the concern that health care will be delayed or underprovided. In addition, Accountable care organizations that perform well on these measurements can receive bonus payments--which they can use to fund programs that encourage health and wellness behavior that help to meet these goals, but are not the kinds of programs for which a health care provider can usually gain reimbursement.

For a skeptical view of accountable care organizations, one starting place would be a recent blog by Robert Samuelson, the always-lucid Washington Post economics columnist. He writes: "Participation in the program may be modest, and savings are likely to be minuscule. ACOs make for good press releases and bad public policy. They give the impression that the administration is “doing something” about health spending when it isn’t." For another skeptical view, a doctor named Scott Gottlieb, writes "Accountable Care Organizations: The End of Innovation in Medicine?" He argues that similar arrangements have not controlled costs in the past, and are unlikely to be a source of innovations in health care.

Tuesday, June 7, 2011

Last week I gave a talk to an alumni group here at Macalester College about budget deficits in the short run and in the long run. For the short-run portion of this talk, I set up my discussion with two figures. I reproduce them here, in part for those who would like to cut-and-paste a copy for their own presentations.

The first figure shows three paths for the unemployment rate. The middle line shows the path for the unemployment rate presented by Christina Romer, head of President Obama's Council of Economic Advisers, in January 2009--more specifically, it's actual data up though 2008, and then a forecast after that date. The bottom line shows Romer's prediction that the unemployment rate would be lower if the "stimulus package" legislation -- the American Recovery and Reinvestment Act of 2009-- was enacted. The top line shows the actual path of the unemployment rate. This version of the figure appears in "Did the Stimulus Stimulate? Real Time Estimates of the Effects of the American Recovery and Reinvestment Act," by James Feyrer and Bruce Sacerdote, NBER Working Paper 16759, February 2011.

Of course, this figure is often used to argue that the stimulus didn't work. But of course, it is equally possible that the January 2009 forecast was too optimistic, and that the stimulus made the unemployment rate lower than it would otherwise have been.

The Congressional Budget Office publishes regular estimates of the effects of the ARRA legislation. The May 2011 report, for example, states that the legislation:

-- Lowered the unemployment rate by between 0.6 percentage points and 1.8 percentage points,
-- Increased the number of people employed by between 1.2 million and 3.3 million, and
-- Increased the number of full-time-equivalent jobs by 1.6 million to 4.6 million compared with what would have occurred otherwise ...

Here's a useful CBO figure for illustrating their case that the stimulus improved matters.

With these two figures to set up the discussion, one can then talk about what makes a stimulus package more or less effective in a variety of contexts. Is it timely, temporary and targeted? What about factors like the pre-existing level of debt, the extent to which the economy is open to international trade, the response of monetary authorities, and other factors?

In their NBER paper, Fehrer and Sacerdote summarize some of the conflicting evidence about the effects of the stimulus. Their own findings, as summarized in the abstracts are: "A cross state analysis suggests that one additional job was created by each $170,000 in stimulus spending. Time series analysis at the state level suggests a smaller response with a per job cost of about $400,000. These results imply Keynesian multipliers between 0.5 and 1.0, somewhat lower than those assumed by the administration. However, the overall results mask considerable variation for different types of spending. Grants to states for education do not appear to have created any additional jobs. Support programs for low income households and infrastructure spending are found to be highly expansionary. Estimates excluding education spending suggest fiscal policy multipliers of about 2.0 with per job cost of under $100,000."

1) At the Technology Review website, Peter Fairley discusses how the policy, if implemented, can lead to higher energy costs and even blackouts in the short term. In the longer term, a Germany that relies less on nuclear power may well end up burning more coal.

2) The Washington Post editorialized on "Germany's nuclear energy blunder," pointing out that if implemented, Germany will probably end importing more electricity--much of it produced by burning fossil fuels.

3) Via Clive Crook's blog at The Atlantic, I found a couple of sets of quick estimates of how unlikely it is that Germany can find enough wind and solar power to substitute for its electricity generation, and thus how phasing out nuclear energy will lead to higher carbon emissions: one set of number is the Breakthrough Institute, the other from Roger Pielke.

4) Finally, for a misguided argument along the German lines, the June 19 issue New Republic carries a leader called "Waste of Energy" (available by subscription only) lamenting that President Obama had deserted the agenda he laid out in February 2009 to wean the U.S. off of fossil fuels. They write: "From the day he took office, Barack Obama had a unified theory of how the United States could recover and prosper. At the center of his plan--which he voiced in an address to a joint session of Congress in February 2009--was the need to reduce the use of carbon-based fuels ..." The editors at TNR argue that this is a recipe both for environmental gains, which is plausible enough, and also for economic gains, which is not plausible. Indeed, the TNR editors argue, quite remarkably, that moving away from carbon-based energy is "the most convincing framework for ensuring America's future prosperity."